My accounting has become a bit rusty, so readers in the profession can judge this Blog for themselves. The Chair of ANZ Bank (who used to be Chancellor of Auckland University!?) and its CEO told a Parliamentary Select Committee into Banking Competition yesterday that its $2 billion annual profits were "fair". CEO Watson told MPs the bank's shareholders had invested $17 billion into ANZ which meant it was probably NZ's "biggest importer of overseas capital .. In return for that $17 billion investment from our shareholders, we make just over $2 billion in net profit after tax each year .. That's a 12 per cent return on equity, which is middle of the road for most publicly listed companies in NZ".
Now take a look at ANZ's accounts for year ended March 2023 (downloadable below). They report profits of over $2 billion, "share capital" of $12 billion and "retained earnings" of $5 billion, giving total shareholder "equity" of $17 billion - which is the number CEO Watson appears to refer to. In other words, there never was $17 billion worth of funds that NZ has benefited from in the sense of it being "imported from overseas" from foreign shareholders. Instead $5 billion of that $17 billion are profits extracted from Kiwis, primarily from interest on their household mortgages. In my view, the CEO's claim that its "shareholders" are only getting a 12% return (being $2 billion / $17 billion) is misleading. The original size of their investment is closer to $12 billion, so the return on that investment is far higher.
Here's a simple example. Say you invest $1 million in a company that has monopoly powers. You make a whopping 25% return on your investment, being $250,000 per year. You retain all of those earnings in the company. After four years your balance sheet reads "share capital $1 million" and "retained earnings" of $1 million (being four years of earning profits of $250,000). That is, in only four years, your $1 million investment is now worth $2 million on the back of your monopoly powers. You get investigated by a Select Committee of MPs looking into competition in your industry. You tell them that you're making a "fair" return on your business - that you've invested $2 million in the business and are only making $250,000 a year, being a 12% return, which barely compensates for the risk. But that's not true. You're making a 25% annual return on your initial investment of $1 million.
ANZ bank is majority owned by Americans. Its giving them a high yield, probably because of less competition in NZ. The Americans never did invest $17 billion here. Much of that so-called "equity" comes from retained (oligopoly) profits made out of local Kiwis. I stand to be corrected & apologize for mistakes in my accounting. Should I not be mistaken, maybe its the CEO of ANZ who should apologize to the Kiwi public & MPs for what, in my opinion, may amount to playing with statistics and numbers to create confusion.
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